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World Finance and Economic Stability

Selected Essays of James Tobin

James Tobin

Nobel Prize winner James Tobin has made outstanding contributions to modern macroeconomics. In this final collection of his work he examines the economic policies of the United States and its relations with other major economies after 1990. In James Tobin’s view, the welfare of populations depends uniquely on these policies and it is important to be aware of their impact.
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Chapter 3: Financial globalization: can national currencies survive?

James Tobin


* The largest private bank in a small country fails. Frightened depositors and creditors desert this country, its banks, and its currency, and its central bank’s plea for foreign assistance garners little response. Affected creditors in neighboring countries, banks and central banks alike, scramble for internationally liquid assets. Interest rates zoom up everywhere, loans are called or not renewed, economic activity sinks, and unemployment quickly rises to politically hazardous rates. The managers of the world monetary system, central bankers individually and collectively, strive above all to maintain the credibility of the system and confidence in existing currency rates. But the effects of their deflationary policies on business conditions instead destroy confidence. In the end country after country has to abandon its commitments to redeem its currency at the promised price. In country after country, then and only then does economic recovery begin, and it takes many years. The place is not East Asia in 1997–8 but Europe and North America in 1931. The bank was the Credit Anstalt in Vienna. The monetary system was the gold standard, as revived after a hiatus due to World War I. Central bankers, finance ministers, prime ministers, and presidents put defense of the gold values of their currencies above all else. Weimar Germany maintained the gold content of the mark but rationed its gold reserves. Its deflationary policies in 1931–2 – high interest rates, tax increases, no relief or work for the jobless – paved the way for Adolf...

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